Summary Judgment Granted

 Flatwork Technologies, LLC (Powerblanket) v Brierley 2020 FC 997 McVeigh J

            2,383,341 / hydraulic boom heating wrap

The 341 patent relates to a heating wrap for articulated hydraulic booms, to keep them operational in very cold temperatures such as in the oilfields of northern Alberta where the invention was developed. In this decision McVeigh J granted a motion for summary judgment, holding the 341 patent invalid for obviousness, essentially on the basis that equipment heating wraps eg for a blowout preventer, were a standard part of the prior art and it was not inventive to apply such a wrap to an articulated hydraulic boom [94].

Takeda Applied: Enantiomers per se Ineligible for Data Protection

 Janssen Inc v Canada (Attorney General) 2020 FC 904 Zinn J

esketamine hydrochloride / SPRAVATO

Janssen applied for data protection for SPRAVATO, in which the medicinal ingredient is esketamine hydrochloride, an enantiomer of the ketamine hydrochloride [3]. Ketamine hydrochloride is the medicinal ingredient in the previously approved drug KETALAR [7]. A drug is only eligible for data protection if it is an “innovative drug” under section C.08.004.1(1) of the Food and Drug Regulations, which provides that a drug is not eligible if it is a variation of a previously approved drug “such as a salt, ester, enantiomer, solvate or polymorph.” In a split decision in Takeda 2013 FCA 13 the FCA interpreted this provision as providing that enantiomers are per se ineligible for data protection: see here. Relying on Takeda, the Minister refused Janssen’s application.

Janssen then sought judicial review of the Minister’s decision. In a straightforward decision, Zinn J applied Takeda to dismiss the application, on the basis that there are no factual differences which could permit him to depart from Takeda [26].

Fixed Costs and Sunk Costs

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

Yesterday’s post discussed Stratas JA’s holding that in an accounting of profits, an infringer may always deduct some portion of its fixed costs [162]. That holding was based on Stratas JA’s rejection of “but for” causation, which does not make allowance for fixed costs unless the infringer had an outside opportunity. I am of the view that “but for” causation, and the differential profit approach from Schmeiser 2004 SCC 34 [102], which follows from it, is sound in principle. Nonetheless, I acknowledge that a real inequity may arise if a deduction for fixed costs is prohibited in cases in which the infringer did not have any outside opportunity. This is not only a moral inequity; it is a serious concern in terms of innovation policy. In this post, I will argue that the ultimate reason for this injustice is not the treatment of fixed costs, but rather the treatment of sunk costs. Consequently, the solution must look beyond an accounting to broader remedial principles, especially principles relating to injunctive relief.

This post is based on the following remark:

[160] Denying the deduction of fixed costs generates a distorted picture of the infringer’s profits. It may be the case that an infringer has minimal variable costs but very high overhead costs such that the product is not, in fact, profitable. The incremental approach. . . could force that infringer to disgorge “profits” from an unprofitable product.

This statement is somewhat obscure and I treated it cursorily in yesterday’s post, noting that there is nothing wrong to requiring the infringer to disgorge profits from an unprofitable product if it would have been even less profitable but for the infringement.

But the phrase alluding to the “distorted picture of the infringer’s profits” suggests a different point. I’m not sure whether it reflects what Stratas JA had in mind, so I didn’t want to treat it at length yesterday, but it’s interesting enough that I decided to devote a post to it. The basic idea is that sunk costs are real costs that must be incurred to make an infringing product, and if no allowance is made for sunk costs the infringer may be required to disgorge more than its actual profits.

Deduction of Fixed Costs in Nova v Dow

 Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

As explained in my first post, Stratas JA’s decision for the majority in Nova v Dow departed from established law by rejecting “but for” causation in the context of an accounting of profits in favour of using a non-infringing “baseline” to assess the amount to be disgorged. Subsequent posts have discussed various conceptual issues: see here and here. This post turns to the specific question of deductibility of fixed costs. This question is important in practice—deduction of fixed costs can have a substantial impact on quantum—it is conceptually difficult, and the case law is unsettled. Stratas JA’s decision would always allow an infringer to deduct some portion of fixed costs, regardless of whether the infringer had another opportunity that it would otherwise have pursued [162]. This is a bold holding, which departs from prior Canadian practice and is in contrast with the UK and Australian law. Unfortunately, Stratas JA’s holding on fixed costs is based on his unorthodox approach to causation, and consequently, as I will suggest in this post, it is unsound in principle.

It’s not clear to me how trial courts and litigants will deal with this issue going forward. On the one hand, the majority in Nova v Dow held that a proportion of fixed costs are always deductible, but on the other hand this holding is based a rejection of “but for” causation in the context of an accounting and is therefore, in my view, inconsistent with the SCC authority in Schmeiser 2004 SCC 34. Now, in many cases, deduction of a portion of fixed costs is permitted by Schmeiser, so it may be some time before a case arises in which the two approaches diverge. When such a case does arise, I would guess that the FC judge will do the calculation both ways, pick one, and then let the FCA sort it out on appeal. Perhaps that day will come sooner rather than later, as the uncertainty created by Nova v Dow will make it more likely that an accounting of profits dispute will go to trial rather than settling.

Non-Infringing Baseline as an Alternative to “But For” Causation

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical “but for” world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. He proposed instead to assess the profit to be disgorged by comparing the infringer’s actual profit against a non-infringing “baseline,” which, in his view, better reveals the value added by the invention itself [62], which is to say the value associated with the “inventive quality” of the patented technology [78]:

[73] Non-infringing alternatives are used not to determine what the infringer could have done instead of infringing (i.e., “but for” reasoning), but instead to establish a non-infringing baseline to isolate the value of the patent.

Stratas JA did not provide an explicit definition of the non-infringing baseline, but rather illustrated its nature with one or two examples. While I appreciate the intuition underlying Stratas JA’s examples, the rule under established law is that the infringer must disgorge the profits caused by the infringement, not the profits associated with the inventive quality of the patented technology. The established “but for” test isolates the profits caused by the infringement and in my view this is sound as a matter of policy.

Stratas JA emphasized the need for a causal nexus throughout his decision, but he made the point in a couple of subtly different ways. In many places he emphasized the need for “a causal connection between the profits to be disgorged and the patent infringement” [46]; and see similarly [27], [32]. In other places he stated that the disgorgement of profit “must focus on the value added by the invention itself” [62]; and see similarly [61] (“causally attributable to the value of the patent”), [78] (quoted below). I’ll argue that there is a difference between these two ways of framing the causation requirement, and that the first is correct while the second is not.

First we need to understand what Statas JA meant by the “value added by the invention itself.” He gave a couple of examples to illustrate what he meant:

[64] What is the value of a patented pain reliever that provides eight hours and one minute of pain relief when there is a non-infringing alternative that provides eight hours of relief? The patentee did not invent pain relievers; the patentee only invented a drug that added an extra minute of relief.

In this example, the pain reliever that provides eight hours of relief is the “baseline” against which the value of the patented pain reliever is to be assessed. To the extent that the eight hour pain reliever is readily available on the market, “but for” causation and the non-infringing baseline give the same result. But for the infringement, the infringer would have used the eight hour pain reliever, and the benefit from the patent is the extra one minute of pain relief, which is also identified by Stratas JA as the value of the patent. Stratas JA’s suggestion at [73] that non-infringing alternatives have really been used to establish a non-infringing baseline seems to be saying that in many cases, such as the pain-reliever example, “but for” reasoning does end up with the correct “baseline” comparator.

Constructing the “But For” World Is Not a Purely Subjective Inquiry

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE SURPASS

In an accounting of profits the infringer is required to disgorge its profits caused by the infringement. In the standard approach causation is determined using the “but for” test, in which the amount the infringer actually earned by using the infringing technology is compared with what the infringer would have earned in the hypothetical world in which it used the best non-infringing option: Schmeiser 2004 SCC 34 [102]. As explained in last week’s post, Stratas JA’s decision for the majority in Nova v Dow rejected “but for” causation in the context of an accounting of profits. In so doing, he gave two thought-provoking examples which raise foundational questions regarding the nature of the “but for” world. In this post and the next, I will argue that it is not necessary to reject “but for” causation in order to address the issues raised by Stratas JA’s examples.

The first example, which is the subject of this post, raises the issue of whether the law takes a subjective or objective approach to the infringer’s behaviour in the “but for” world. As I understand Stratas JA’s analysis, he is of the view that the “but for” test for causation requires a purely subjective inquiry into what the particular infringer would have done but for the infringement. I will argue that on the contrary, “but for” causation often incorporates an objective element, both in the law generally and in the patent context. I will suggest that the prior caselaw is consistent with an approach in which the “but for” world is constructed by asking what an informed and prudent party in the position of the infringer would have done but for the infringement. Such an approach would address the concerns raised by Stratas JA’s first example.

To turn to the details, Stratas JA provides two examples to illustrate the proposition that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. In the first, the infringer, but for the infringement, would have invested in speculative stocks:

[69] For example, if an infringer could prove in evidence that, but for the infringement, it would have used its capital to invest in, say, Apple or Amazon before their market ascendance then the infringer could retain the vast majority, if not all, of its profits. But for the infringement, the infringer would have earned much more investing in Apple or Amazon than selling the infringing goods. By Professor Siebrasse’s “but for” logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability.

[70] The reality is that infringers may not always pursue the next best non-infringing alternative. It may be the case that without access to the patented product, the infringer might have pursued an entirely different course, for example, speculative investments in emerging tech companies, and would have lost everything.

I’ll call this the Apple / Amazon example. The reference is to my 2004 article, “A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms” (2004), 20 CIPR 79, that was cited with approval in Schmeiser [102].

Stratas JA emphasized throughout his decision that an accounting requires disgorgement of all profits caused by the invention, and only profits caused by the invention: [27], [32], [39], [46], [61], [ 62]. I agree. Stratas JA is evidently of the view that the value of the patented seed does not depend on whether, but for the infringement, the infringer would in fact have invested in Apple at its nadir or Yahoo at its peak. Again I agree. More broadly, I take his point to be that the value of the invention should not necessarily be assessed on solely the basis of a strictly factual inquiry as to what the particular defendant would have done but for the infringement. Here again, I agree.

However, Stratas JA offered this example to show that “[t]he use of hypotheticals and the ‘but for’ test . . . has no place in an accounting of profits” [67]. That is, Stratas JA is evidently of the view that the “but for” test for causation does not get us to the right result in the Apple / Amazon example: “By Professor Siebrasse’s ‘but for’ logic, the infringer would not have to disgorge anything because using the infringing product was actually detrimental to the infringer’s overall profitability” [691]. From this I infer that Stratas JA is of the view that the use of a hypothetical “but for” test for causation necessarily entails a subjective approach, requiring an inquiry as to what the particular infringer would have done had it not infringed; therefore, in his view, if the inquiry is not subjective, it is necessary to reject the “but for” test for causation. This is where I disagree. The law of causation permits the use of an objective approach, or at least an objective element, in assessing the defendant’s behaviour in the “but for” world, and the concern raised by the Apple / Amazon example can be addressed within the standard framework by using an approach that asks how a reasonable infringer in the position of the defendant would behave.

Now, a purely subjective approach is not as unreasonable as it might appear at first impression, notwithstanding the intuitive appeal of the Apple / Amazon example. If a purely subjective approach were used then in some cases, as Stratas JA pointed out, the profits to be disgorged would be much less than the true value of the invention; an inventor who, but for the infringement, would have gambled and won, would be better off than one who had invested prudently [69]. On the other hand, as Stratas JA also pointed out, in some cases the award would be higher than the true value of the invention, in cases in which the infringer would have gambled and lost [70]. In theory, this should all come out in the wash. Sometimes the infringer would win, sometimes it would lose, but these random deviations from the true value of the invention would all average out. Since the patent incentive is prospective, the expected return to invention would stay the same and incentive function of the patent system would not be impaired.

However, there are two second order problems with a purely subjective approach. First, on the facts of any given case, the award might fail to reflect the value of the invention if the infringer would have behaved idiosyncratically. If a patentee received half the value of their invention, it would be cold comfort to tell them that some other patentee in some other trial would get twice what they deserved. Similarly, an infringer hit with an award much greater than the value of the invention to them would not appreciate being told, “Don’t worry, some other infringer will get off scot free.” Second, there is a selection bias problem. Patentees who anticipated that the accounting award would be unduly low as a result of idiosyncratic behaviour by the infringer would elect damages instead. This means that it would not all come out in the wash: the accounting cases would disproportionately reflect cases in which the infringer would be required to disgorge more than the value of the invention.

Thus, I agree that the Apple / Amazon example raises a real problem. But the solution is not to abandon “but for” causation. Rather, it is to use an objective approach to the infringer’s behaviour in the “but for” world.

So, in Mustapha 2008 SCC 27, the defendant owed a duty to the plaintiff and breached its duty by supplying bottled water with a dead fly in it. This in fact caused significant mental harm to the plaintiff. While the trial judge awarded damages, the SCC reversed, holding that the damages suffered were too remote to be viewed as legally caused by the defendant’s negligence, unless it could be shown that “a person of ordinary fortitude” would suffer serious injury in the same circumstances: [18]. Thus, the trial judge erred by applying a subjective standard—looking solely to the effect on the particular plaintiff—when an objective standard—looking to a person of ordinary fortitude—should have been used. Now, Mustapha was a negligence case, and foreseeability considerations are not relevant in intentional torts, and have not generally been raised in patent infringement. But the broader point is simply that “but for” causation does not inherently require a subjective inquiry into the effect of the wrong on the particular defendant.

Nor is the “but for” inquiry purely subjective in patent law generally. For example, if a patentee cannot prove damages in the form of lost profits, it is entitled to damages in the form of a reasonable royalty. The reasonable royalty is determined on the basis of a hypothetical negotiation between the infringer and the patentee at the time of the infringement. This hypothetical negotiation is not simply a reconstruction of what would have in fact happened but for the infringement; on the contrary, it is commonly applied when it is clear on the facts that the patentee would have refused to licence to the infringer on any terms. As the en banc Federal Circuit remarked in the leading case of Rite-Hite v Kelly 56 F3d 1538, 1554 n13 (Fed Cir 1995), the “willing licensor/willing licensee” characterization is “inaccurate, and even absurd, when, as here, the patentee does not wish to grant a license.” Moreover, it is well established, at least in US law, that the parties to the hypothetical negotiation are taken to bargain on the basis that the patent was valid and infringed, even though parties to an actual negotiation would not have known that the patent was valid and infringed, and so would normally be expected to allow a discount to allow for the possibility of invalidity. As another example, it would seem that a patented alternative will not be considered a legitimate alternative, even if the infringer would in fact have used it: see Cefaclor 2018 FCA 217 [55] and here.

The problem of idiosyncratic defendant behaviour specifically has also been raised in the patent infringement context. In Cefaclor 2018 FCA 217 the question was whether the putative NIA would have been economically viable. Gauthier JA for the FCA held that while the subjective perspective of the infringer may be relevant [72], it is not determinative (original emphasis):

[72] In my view, economic viability is not something that is assessed solely from the subjective perspective of an infringer such as Apotex. . . .

[73] However, as I noted earlier, the court’s goal is to assess the real value of the patented invention(s). Such value cannot be assessed on a purely subjective basis. Evidently, the court must be satisfied that the NIA invoked was objectively an economically viable substitute at the relevant time. To say otherwise would mean that the value of a patent could be artificially reduced by an infringer who behaves in an unorthodox manner, or whose adoption of a substitute is motivated by reasons other than economic ones.

This seems to me to be a direct answer to the Apple / Amazon example. Gauthier JA identified exactly the same problem raised by Stratas JA, and addressed it by holding that a purely subjective approach to the “but for” world should not be used.

With that said, I do not want to endorse a strictly objective approach to the defendant’s behaviour in the “but for” world. The main difficulty with an objective test is determining what is in fact objectively reasonable. As Gauthier JA pointed out in Cefaclor, what the particular infringer would have done helps inform what a reasonable party in the same position would have done [72]. If the actual infringer is in fact reasonable, then the two inquiries will give the same result. In the business context, at least, it is probably sound to presume that the particular infringer was reasonable: see here. That means that even if we adopt an approach to infringer behaviour in the “but for” world that is objective in principle, a subjective inquiry will almost always be necessary and will often be determinative. In most cases it will difficult to disentangle whether the inquiry is subjective or objective, and unnecessary to do so.

So, my point here is not to argue for a specific objective test. Rather, my argument is simply that it is not necessary to entirely reject “but for” causation to deal with the issue of idiosyncratic infringer behaviour. The “could have and would have” test for assessing whether a putative non-infringing alternative may be considered was originally set out in Lovastatin 2015 FCA 171. While that test continues to develop through the case law, it provides a good framework for balancing subjective and objective considerations in constructing the “but for” world. Consequently, in my view the existing legal framework of “but for” causation is entirely capable of addressing the problem raised by the Apple / Amazon example.

I’ll end with a couple of tangential notes. First, the issue of a subjective or objective approach to the “but for” world was not decided in Schmeiser. The question in Schmeiser was the whether the entire actual profits were to be disgorged or only the differential profits. It did not purport to settle all the details of the way in which the differential profit approach should be applied, in the same way that the SCC’s endorsement of “but for” causation in Athey [1996] 3 SCR 458 did not settle the precise nature of the test in the context of psychological injury that was addressed in Mustapha. Second, it is not clear to me why Stratas JA was of the view that the logic in my 2004 article would imply a subjective approach [69], given that the description I gave in the passage quoted by Stratas JA at [68], suggested that the touchstone would be an objective one, of a defendant acting in “a prudent and informed manner” while trying to maximize its profit without infringing. With that said, I have to admit that my suggestion of an objective test in my 2004 article was largely fortuitous, as the focus of my argument was that the differential profits should be disgorged, and not the entire actual profits. In any event, the issue needs to be addressed in light of the case law as it has developed since Schmeiser, in cases in which these problems arise on the facts.

 

Nova v Dow: A Radical Departure from Established Law

Nova Chemicals Corporation v Dow Chemicals Company 2020 FCA 141 Stratas JA: Near JA / Woods JJA dissenting, aff’g 2017 FC 350, 2017 FC 637 Fothergill J

            2,160,705 / film-grade polymers / ELITE, SURPASS

The decision of Stratas JA for the majority in Nova v Dow raises a panoply of important conceptual and practical issues related to an accounting of profits, and non-punitive monetary remedies more broadly: whether the test for causation is the same in an accounting and damages; whether an accounting should provide a disincentive to infringe; the nature of the non-infringing alternative in the “but for” world; whether the hypothetical world should be constructed on subjective or objective terms; the role of opportunity costs; and the deductibility of fixed costs. And this is not to mention other less foundational but nonetheless significant issues of disgorgement of springboard profits and the date for currency conversion. Unfortunately, this decision is not likely to settle any these issues; on the contrary, it is likely to increase uncertainty in this entire area of law.

In a series of decisions, following from the seminal decision of the SCC in Schmeiser, 2004 SCC 34, the FCA has built up what I consider to be a sound and principled approach to non-punitive remedies: see Lovastatin Damages 2015 FCA 171; Venlafaxine s8 2016 FCA 161; Perindopril Accounting #1 2017 FCA 23; Cefaclor Damages 2018 FCA 217; Perindopril Accounting #2 2020 FCA 60. While some important loose ends remain outstanding, the foundations were solid. Stratas JA’s decision for the majority in Nova v Dow has thrown a grenade into that edifice and rattled it down to those foundations. The general statements of principle set out by Stratas JA constitute, in my view, a radical and unsound departure from established principles, including those set out by the SCC in Schmeiser. Some specific holdings might be seen as refinements of prior law, but even then, because of the unorthodox reasoning, it is not clear whether even these points can now be considered settled.